William Pfaff on General Motors

Posted on Jul 18, 2008

By William Pfaff

According to a new American book, and old theory, the reason capitalism is in crisis is that it spends too much on its workers.

The central bankers and Western governments, together with the economic analysts, seem agreed that it would be a near-mortal blow to the presently stumbling international economic system if employers paid more to workers. This threat is known to economists as “wage inflation.” The European Central Bank recently warned that it jeopardizes the interests of the European Union economy.

The book is called “While America Aged: How Pension Debts Ruined General Motors, Stopped the New York Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis.” The author is Roger Lowenstein.

His argument is that paying its workers what it agreed to pay them is ruining General Motors, along with other major American corporations. GM in 1950 signed a five-year contract with the United Automobile Workers agreeing “to provide rich pensions and health care” (Lowenstein’s words) to its workers. Today that commitment and the ones that have followed have “robbed” General Motors “of its financial flexibility and its cash.”

While America Aged

By Roger Lowenstein

The Penguin Press, 288 pages

Why did GM sign such a contract in 1950? United Auto Workers leader Walter Reuther urged the automobile manufacturers instead to join the UAW in demanding from the government the kind of agreements that were being made in Europe, by which the state assumed responsibility for universal health care and retirement protection for all citizens.

If business had accepted Reuther’s proposals, a federal welfare system would necessarily have been funded from taxes, as in Europe. In that case Lowenstein could have written his book today on how “taxes ruined General Motors,” etc., and gone on to deplore that business had not been allowed the freedom in the 1950s to negotiate its own wages and pensions agreements with the unions.

General Motors and the other automakers, with corporate America generally, condemned Reuther’s proposals as calling for a “socialized welfare state.” Instead GM signed its individual contract with the UAW, and in subsequent years applied an equivalently “self-destructive” logic to wage negotiations with the unions. Rather than pay more, the company chose to increase worker benefits. In 1961, for example, it offered only a 2.5 percent wage increase, making it acceptable by simultaneously guaranteeing a 12 percent rise in pensions. It did not want to pay today, and the union unwisely accepted GM’s promise to pay tomorrow.

Tomorrow has arrived, and General Motors, seconded by much of corporate America, and by Roger Lowenstein, would like to be allowed to welsh on its promises.

As Lowenstein writes in The New York Times, the company’s stock is at its lowest level in 50 years, and its market valuation has plunged to $5.9 billion. It might even have to sell off Buick and Pontiac to pay its obligations.

“Who shot General Motors?” he asks. He says that by “maintaining a corporate welfare state,” the company “poured tens of billions of dollars” into its contractual obligation to fund the pensions of its workers, “an irretrievable loss of opportunity.”

One is staggered by the arrogance and social nihilism of this comment. To whom is General Motors obliged, both contractually and morally? Surely to its workers. That is one of the great social compromises making modern capitalism possible. The company also is obliged to its stockholders, on whose behalf its executives were supposed to be acting while mismanagement dilapidated this once-great corporation.

A corporation possesses the status of independent legal personality in doing business, the salient significance of which is that the responsibilities of the individual owners are assumed by the corporation. Corporate liabilities are limited to the assets corporately owned, and the assets of individual owners (in most cases) cannot be seized by corporate creditors.

This privileged status implies management responsibility to exercise proper vigilance in assuring the interests of both the owners and the employees to whom the corporation has a contractual and, more important in a democratic society, a moral responsibility.

The unstated but clearly implied position of Lowenstein is that General Motors employees unfairly enjoy pensions and insurance rights which conflict with the current interests of stockholders and managers, and the corporation’s own interest in survival.

As a layman, I would be interested to know the moral and social argument for privileging stockholder and management interests over the interests and contractual claims of employees.

In the present climate of business and economic opinion, I would assume that it would be that the survival and prosperity of the national economy is a generally good superior to the claims of any particular group in the economy. This much is true. But is the survival of a particular corporation, General Motors, a public interest superior to the well-being of its past and present workers?

Does this additionally mean that management which mismanages nonetheless possesses a claim on the corporation and its assets superior to that of the employees who suffer the direct consequences of this mismanagement? Stockholders—in theory—can dismiss management. Some stakeholders in a corporation can sue managers for malfeasance. Why can’t employees?

William Pfaff is the author of numerous books, including “Barbarian Sentiments,” “Condemned to Freedom” and the “Politics of Hysteria.” His essay is courtesy of Tribune Media Services.